Shadow banks under rules spotlight

Gareth Hutchens

AUSTRALIA'S prudential and corporate regulators will jointly develop plans to better regulate the shadow banking industry, marking the final stages of a regulatory crackdown on finance companies that issue debentures to retail investors.

Financial Services Minister Bill Shorten said at the weekend that the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority needed to consult more widely with industry early next year on proposals to better regulate the debenture industry.

The move follows the $660 million collapse of Banksia Securities in October, and comes just days after non-bank lender Southern Finance finalised its quick fire sale to Bendigo and Adelaide Bank - a sale that was designed to prevent a run on Southern Finance by spooked investors.

The proposals include the introduction of mandatory minimum capital and liquidity requirements for retail debenture issuers, and restrictions on the ability of debenture issuers to offer ''at call'' investments or to use ''bank-like'' terms to describe their products. They also include proposals to improve on-going disclosure to investors, and to allow trustees to better monitor issuers' financial performance and compliance with their legal obligations.

Mr Shorten said the proposals were designed to reduce the likelihood of debenture issuers failing as a result of poor lending decisions or a run by investors.

They also aimed to more clearly differentiate debenture issuers from banks, building societies and credit unions that are regulated under the APRA's prudential framework, he said.

''The recent collapse of Banksia Securities highlights the need to place the industry on a more sustainable footing and restore investor confidence,'' Mr Shorten said. ''Investors need to appreciate that investments in finance companies carry higher risks and are not the same as deposits with ADIs [authorised deposit-taking institutions] that are actively supervised by APRA.''

The International Monetary Fund in November warned that Australia needed to tighten its rules allowing non-bank lenders to offer banking services without any oversight from the banking regulator.

Bendigo and Adelaide Bank announced on Friday that it would acquire the $290 million loan book and other assets from Southern Finance, with the purchase price to repay Southern Finance note holders.